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Nutter Bank Report, February 2013

The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.

The Massachusetts Division of Banks has released proposed amendments to its right-to-cure regulation that would prohibit mortgage lenders, including banks, from foreclosing on certain types of home mortgage loans if modifying the mortgage is less expensive to the institution than foreclosing. The amendments proposed on January 31 would modify the regulation that implements the Massachusetts notice and right-to-cure requirements for mortgage lenders and servicers. The proposed amendments would establish a process for lenders to deliver a “Right to Request a Mortgage Loan Modification” notice to certain borrowers along with the right-to-cure notification required by Chapter 244, Sections 35A and 35B of the General Laws of Massachusetts. Lenders would also be required to file a copy of the “Right to Request a Mortgage Loan Modification” notice with the attorney general’s office. The modification notice requirements would apply to home mortgage loans with features such as a teaser rate, interest-only payments (other than an open-end home equity line of credit), negative amortization, limited or no documentation of the borrower’s income or assets, certain prepayment penalties or loans meeting certain loan-to-value criteria. If an eligible borrower requests a loan modification in response to the notice, the proposed amendments would require the lender to assess the borrower’s ability to make a lower monthly payment as well as whether the modification would be in the interests of the creditor. The amendments provide that a modified mortgage loan is considered to be in the interests of the creditor in any case where the net present value of the modified mortgage loan equals or exceeds the anticipated net recovery from foreclosure and provides for an affordable monthly payment for the borrower. The Division held a public hearing on the proposed amendments on February 6. Written comments on the proposal were due by February 15.

Nutter Notes: The proposed amendments would supplement the Division’s existing foreclosure prevention regulation, which implements a 2010 Massachusetts law that provides a standardized process for lenders and servicers to inform a borrower of a mortgage default and to disclose repayment options in order to prevent a foreclosure. The law requires that notice be provided to residential borrowers in default of a right to cure the default. The law was amended in 2012 to require mortgage lenders to make a good faith effort to avoid foreclosure before proceeding with a foreclosure sale on certain types of home mortgage loans. The 2012 amendments also require lenders to determine whether the value of modifying the same types of home mortgage loans would outweigh the likely value of foreclosure and, if so, the lender must make the loan modification. The law requires the Division to adopt regulations implementing the loan modification requirements. The Division’s proposed rules set forth the process for borrowers to request a mortgage loan modification and detail the actions that represent a lender’s and a borrower’s good faith participation in the process to develop a mortgage loan modification. The Division’s proposed rules include requirements for how and when lenders should communicate with borrowers, how and when borrowers should respond to lenders, and set standards to determine whether a lender has met the requirements of the foreclosure prevention law. The Division’s guidance on compliance with the new Massachusetts foreclosure prevention law issued on August 3 will continue to apply until final amendments to the right-to-cure regulation become effective.

The U.S. Department of Housing and Urban Development (“HUD”) has issued a final rule to establish a national standard for determining whether a housing practice that has a discriminatory effect violates the federal Fair Housing Act. The final rule announced on February 8 establishes a three-part test for proving liability for an unlawful discriminatory effect on housing-related activities, including the financing of homes, on the basis of race, color, religion, sex, disability, familial status or national origin. The test does not take into consideration whether there has been any intention to discriminate, but focuses instead on whether a particular housing practice results in a discriminatory effect. Under this test, the party charging discrimination first bears the burden of proving that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. If the charging party offers sufficient proof, the rule shifts the burden of proof to the party charged with discrimination to prove that the challenged practice is necessary to achieve one or more of its “substantial, legitimate, nondiscriminatory interests.” If the party charged with discrimination satisfies this burden, then the charging party may still establish liability for discrimination by proving that the “substantial, legitimate, nondiscriminatory interest” could be achieved through an alternative means with a less discriminatory effect. The final rule also adds and revises illustrations of practices that violate the Fair Housing Act either through intentional discrimination or through a discriminatory effect. The final rule becomes effective on March 18.

Nutter Notes: The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) prohibits discrimination in the sale, rental or financing of dwellings and in other housing-related activities on the basis of any protected characteristic described above. HUD has authority to interpret and enforce the Fair Housing Act. In the course of previous interpretations and enforcement actions, HUD has taken the position that the Fair Housing Act prohibits practices with an unjustified discriminatory effect, regardless of whether there was intent to discriminate. The courts have generally agreed with HUD’s interpretation. However, the Fair Housing Act does not specify a standard for establishing liability for a violation of the statute on the basis of a discriminatory effect. As a result, different courts, and HUD in administrative enforcement proceedings, have applied differing standards to determine liability for discriminatory effects. The release of the final rule could affect a pending petition to the U.S. Supreme Court to hear a case under the Fair Housing Act that challenges the validity of discrimination claims on the basis of disparate impact analysis. HUD’s final rule is seen by some as an expansion, rather than a mere clarification, of disparate impact standards that could ultimately increase housing costs for consumers.

3. CFPB Issues Guidance on Mortgage Loan Servicing Transfers

The Consumer Financial Protection Bureau (“CFPB”) has issued guidance to mortgage servicers, including banks engaged in mortgage loan servicing activities, about the legal requirements that protect consumers during loan transfers. The guidance, CFPB Bulletin 2013-01 published on February 11, 2013, warns that the CFPB may require servicers “engaged in significant servicing transfers” to prepare and submit informational plans describing how the servicers will manage the risks to consumers related to transferring mortgage loan servicing rights. The guidance applies to any transfer of servicing rights, whether the servicing rights have been separated from ownership of the note or whether there has been a transfer of the whole loan including servicing rights. The guidance describes federal laws that apply to mortgage loan servicing and servicing transfers, including the Real Estate Settlement Procedures Act (“RESPA”), the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. The guidance also warns that the CFPB plans to direct examination and enforcement efforts to particular areas of concern in connection with mortgage servicing transfers. These areas of concern include how a transferor servicer has prepared for the transfer of servicing rights and responsibilities, how a transferee servicer handles the files transferred to it, and the policies and procedures the transferor and transferee have implemented for loans with loss mitigation in process, such as pending loss mitigation applications, trial modifications, forbearance plans, or short sale/deed-in-lieu agreements. The CFPB has supervisory authority over mortgage loan servicing activities of large depository institutions and service providers to small depository institutions, among other consumer financial service providers.

Nutter Notes: The CFPB announced concurrently with its issuance of the mortgage loan servicing guidance that it intends to monitor all mortgage servicers, including banks of any size, for compliance with the laws protecting borrowers from the risks that can arise in servicing transfers. Last month, the CFPB issued servicing rules under RESPA and the Truth in Lending Act that will become effective on January 10, 2014. Among other things, the new rules require all mortgage loan servicers to maintain policies and procedures that are reasonably designed to facilitate the transfer of necessary information in connection with mortgage servicing transfers. The guidance discusses the issues that must be addressed by such policies and procedures, such as timely and accurate transfer of documents and other necessary information by a transferor and identification of documents or information that may not have been transferred. The guidance also describes the kind of information that generally must be included in a mortgage servicing transfer plan when the CFPB requires a servicer to submit such a plan. Such plans generally must include the number of loans involved in a particular transfer, total servicing volume being transferred (measured by unpaid principal balance), information about the transferor’s and transferee’s servicing platforms, and descriptions of systems testing, staff training, error correction and customer complaint resolution plans.

Maine’s highest court has ruled that a mortgage loan servicer may initiate foreclosure proceedings on behalf of the owner of the mortgage note. The Maine Supreme Judicial Court’s February 7 decision involved an interpretation of a 2009 Maine law that requires that, in a foreclosure, the mortgagee must “certify proof of ownership of the mortgage note.” The mortgage loan in question was purchased, after a series of transfers, by a government sponsored enterprise. The bank that sold the mortgage loan continued to service it under a loan servicing contract with the purchaser and held the mortgage note, which bore a blank endorsement for transfer. When the borrower defaulted, the servicer initiated foreclosure proceedings on behalf of the owner of the mortgage note. In challenging the foreclosure, the borrower argued that the statute permits only the owner of a mortgage note to initiate foreclosure. Under the borrower’s interpretation, only an “owner” and not a “holder” may bring a foreclosure action under Maine law. The court disagreed, holding that the statute requires only that the plaintiff (the loan servicer in this case) “identify the owner or economic beneficiary of the note and, if the plaintiff is not the owner, to indicate the basis for the plaintiff’s authority to enforce the note” on behalf of the owner or economic beneficiary. The court also ruled that the servicer was entitled to enforce the mortgage note under the Uniform Commercial Code because the note was in the servicer’s possession.

Nutter Notes: The court had ruled against a foreclosing bank in an earlier case where the bank failed to supply evidence that it owned the note and mortgage. In its decision, the court discussed the legislative history of the requirement in the foreclosure statute that a plaintiff must certify proof of ownership of the mortgage note. The court noted that, according to committee records, one of the problems the legislature considered as it drafted the statute was the inability of some borrowers in foreclosure to contact someone with authority to negotiate a loan modification or otherwise settle a foreclosure action brought by a servicer. However, the court found no evidence that the specific provision of the statute at issue in this case was intended to remedy that problem. In its decision, the court said that the legislature sought to improve the ability of foreclosure defendants to negotiate loan modifications, but that the plain language of the law requiring the mortgagee to certify proof of ownership does not link that policy goal to a requirement that only the economic beneficiary of a mortgage note may sue for foreclosure. The court concluded that the phrase “certify proof of ownership of the mortgage note” requires only that a plaintiff identify the owner or economic beneficiary of the mortgage note and, if the plaintiff is not the owner, prove that it has authority to enforce the mortgage note on behalf of the owner.

5. Other Developments: Preemption and Commissions on the Sale of Securities

FDIC Issues Guidance on Persona Non Grata Determinations

The FDIC published modifications on February 8 to its Statement of Policy for Section 19 of the Federal Deposit Insurance Act (“FDI Act”), which addresses whether individuals convicted of certain criminal offenses may participate in the affairs of an insured depository institution.

Nutter Notes: Section 19 of the FDI Act prohibits a person convicted of certain criminal offenses from participating in the affairs of an insured depository institution without the prior written consent of the FDIC. The FDIC’s statement of policy for Section 19 sets forth exceptions under which the FDIC will grant an automatic approval under Section 19.

FINRA Issues Proposal to Amend Rules on Commissions and Fees

FINRA last month requested comment on proposed amendments to rules governing markups, markdowns, commissions and fees on securities transactions. The changes, published in Regulatory Notice 13-07, revise certain factors used to determine the reasonableness of markups and commissions but retain the five percent markup policy in NASD IM-2440-1. Comments on the proposed amendments are due by April 1.

Nutter Notes: FINRA’s proposed amendments would also eliminate a requirement to provide commission schedules for equity securities transactions to retail customers and extend the proposed markup rules to transactions in certain government securities. FINRA initially sought comment on proposed amendments to the markup rules in 2011 under Regulatory Notice 11-08. The new proposal reflects changes in response to comments received on the 2011 proposal.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a “broad platform of legal expertise and experience” in the practice “helps clients manage challenges and balance risks while delivering strategic solutions.” Clients praised Nutter banking lawyers as “very responsive and detail-oriented.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Melissa Maichle. The information in this publication is not legal advice. For further information, contact:

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.